15.3 Reviews of Interim Financial Information (AU-C 930 & PCAOB AS 4105)
Key Takeaways
- AU-C 930 governs a nonissuer interim review when the latest annual statements were audited, the auditor audited them or audits the current year, and the framework matches.
- An interim review provides limited assurance through analytical procedures and inquiries, reading minutes, and written representations, without tests of controls or confirmations.
- If material modifications appear necessary and management does not respond, the auditor informs those charged with governance and then considers resigning from the review.
- When the auditor cannot complete an AU-C 930 review, the auditor issues no review report and communicates the situation to management and those charged with governance.
- Reviews of issuer quarterly Form 10-Q information follow PCAOB AS 4105, while other nonissuer reviews that fail the AU-C 930 conditions follow SSARS AR-C 90.
15.3 Reviews of Interim Financial Information (AU-C 930 & PCAOB AS 4105)
Blueprint Link: Area IV.E.3 asks you to identify the factors an auditor considers when reporting on an engagement to review interim financial information. The first skill is recognizing which standard governs the review.
1. Which Standard Applies?
| Situation | Governing Standard |
|---|---|
| Nonissuer; the entity's latest annual financial statements were audited, the auditor either audited them or has been engaged to audit the current year, and the interim information uses the same financial reporting framework as the annual statements | AU-C 930, Interim Financial Information (a GAAS review performed by the entity's auditor) |
| Nonissuer interim statements when those AU-C 930 conditions are not met (for example, the annual statements were never audited) | SSARS AR-C 90, Review of Financial Statements |
| Issuer quarterly financial information in Form 10-Q (SEC rules require an independent accountant's review before filing) | PCAOB AS 4105, Reviews of Interim Financial Information |
Exam Trap: A private company's quarterly review is not automatically an SSARS engagement. If the company's own auditor performs it and the AU-C 930 conditions are met, AU-C 930 governs.
2. Objective and Level of Assurance
The objective is to obtain a basis for reporting whether the auditor is aware of any material modifications that should be made for the interim information to follow the applicable framework. This is limited assurance obtained mainly through analytical procedures and inquiries. A review is substantially less in scope than an audit and does not provide a basis for an opinion.
Engagement acceptance: The auditor establishes a written understanding with management (and those charged with governance when appropriate) covering the objectives, management's responsibilities for the interim information and internal control, the auditor's responsibilities, and the limits of a review. Without that understanding, the auditor should not accept or perform the engagement.
3. Review Procedures
Because the auditor has audited (or will audit) the annual statements, the review builds on existing knowledge of the entity and its internal control.
- Update knowledge of the entity and internal control: Read the prior year's audit documentation for significant risks and identified misstatements, and inquire about changes in the business and in internal control over interim reporting. If the auditor lacks that knowledge (for example, in a first-year engagement), procedures are needed to obtain it.
- Analytical procedures: Compare interim amounts with prior interim periods, budgets, and expected relationships (for example, gross margin and receivable turnover), and investigate unusual results.
- Inquiries of management: Ask about accounting principles and any changes, unusual or complex transactions, significant journal entries, subsequent events, known or suspected fraud, noncompliance with laws, and matters raised in previous engagements.
- Read minutes of meetings of stockholders, the board, and board committees.
- Obtain reports from other accountants who reviewed significant components.
- Agree the interim information to the accounting records.
- Obtain written representations from management covering the interim periods reviewed, dated as of the review report date.
The auditor is not required to test controls, confirm balances, or observe inventory. However, if information comes to the auditor's attention suggesting that the interim information may be materially misstated, the auditor performs additional procedures.
4. Communications When Problems Arise
| Finding | Required Response |
|---|---|
| Material modifications appear necessary | Communicate to the appropriate level of management on a timely basis. If management does not respond appropriately within a reasonable time, inform those charged with governance. If they also do not respond appropriately, the auditor considers whether to resign from the review engagement and whether to continue as the entity's auditor. |
| Fraud or noncompliance with laws and regulations | Communicate as required by AU-C 240 and AU-C 250 |
| Significant deficiencies or material weaknesses identified | Communicate in writing to management and those charged with governance |
| Review cannot be completed (for example, management limits inquiries) | Do not issue a review report; communicate the situation to management and those charged with governance |
5. The Review Report
A written report may be issued (and it is expected when the interim information is presented with a reference to the auditor's review). Typical elements:
- A title that includes the word independent and an appropriate addressee.
- Identification of the interim financial information reviewed.
- Management's responsibility for the interim information, including internal control.
- The auditor's responsibility, stating that the review was conducted under GAAS applicable to reviews of interim financial information and is substantially less in scope than an audit, so no opinion is expressed.
- The conclusion: "we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with" the framework.
- Signature, city and state, and the date the review procedures were completed.
Modifications:
- Departure from the framework (including inadequate disclosure): describe the departure and its effects if practicable in a separate paragraph, and modify the conclusion to state that, except for that matter, the auditor is not aware of material modifications.
- Going concern: If substantial doubt exists and is adequately disclosed, the auditor may add an emphasis-of-matter paragraph; if disclosure is inadequate, it is a departure.
- Scope limitation: No report is issued, because the review is incomplete.
6. Side-by-Side Comparison
| Feature | AU-C 930 Review | SSARS AR-C 90 Review | PCAOB AS 4105 Review |
|---|---|---|---|
| Who performs it | The entity's auditor | An accountant (need not be the auditor) | The issuer's registered auditor |
| Required knowledge of internal control | Yes, as it relates to annual and interim reporting | Not required | Yes |
| Assurance | Limited | Limited | Limited |
| Written representations | Required | Required | Required |
| When a review cannot be completed | No report | Withdraw | No report |
A privately held company asks its CPA firm to review its quarterly financial statements. Under which circumstances does AU-C 930, rather than SSARS, govern the engagement?
Which set of procedures is characteristic of a review of interim financial information under AU-C 930?
During an AU-C 930 review, the auditor concludes that the interim financial information omits a material required disclosure. Management declines to add it. What should the auditor do?
Management of a nonissuer refuses to let the auditor make key inquiries needed to complete a review of interim financial information under AU-C 930. How should the auditor report?